Many people have questions about the credit scores generated by Fair, Isaac & Co. Today on Tech Ticker, Aaron Task and I figured we’d take our questions straight to the source: Mark Greene, chief executive of Fair, Isaac & Co., creator and proprietor of the FICO score.

“The FICO score is a measure of a consumer’s financial health and creditworthiness,” Greene says. It’s simply a number, ranging from 300 to 850 — the higher the better. The average FICO score in the U.S. is about 700, and pretty much every bank in the country uses a FICO score when making lending decisions. But while the scores are important, they’re not the be all and end all.

“Scores are meant to be one of several things bankers use in doing what we call sound underwriting,” Greene says. Lenders should also be taking into account borrowers’ background references, their capacity to repay loans, and collateral.

FICO creates the score simply by feeding numbers into its formula: “It’s based on pure, statistical evidence, with no judgment or evaluation or emotion.” The main factors Fair, Isaac takes into consideration are:

• How much total indebtedness a consumer has

• How long they’ve had the debt. “Newer relationships are riskier than things you’ve been paying over a long period of time,” Greene says.

• How much available credit is being used: “If you’re close to the edge on your credit cards, that’s a danger signal.”

• The mix of an applicant’s credit portfolio — is it all credit cards (bad) or a mixture of credit cards, a mortgage, and a car loan (better)?

Greene outlines three key ways through which people can improve their scores. First, pay your bills on time. Second, don’t get close to the edge: “Don’t use more credit than you really need.” And third, don’t apply for new credit unless you absolutely have to.

It may sound obvious, but the easiest way to avoid a sharp downgrade in your FICO score is to stay current on your mortgage and stay solvent. “One thing people should know is that a foreclosed home or personal bankruptcy is the most severe harm that you can do to your credit score,” Greene says. FICO scores can fall by as much as 150 points when borrowers walk away from mortgages or declare bankruptcy; it can take up to seven years to rehabilitate the rating.

Greene helps clear up what may be some misconceptions about the way credit scores are calculated. For example, is it true that every time you apply for a loan it hurts your score?

“It depends on the kind of product you’re shopping for,” says Greene. With car loans, for example, Fair, Isaac understands that people shop for rates. “If you apply for five different car loans within a couple of days, we understand that you’re looking to buy one car at the best rate. And there’s no adverse impact on your credit score.”

On the other hand, when people apply for five different credit cards in the space of a week, they’re usually seeking to open multiple accounts simultaneously. “In those situations we will take a few points off someone’s FICO score because we’re worried they’re sending a signal that they need too much credit.”

Is it also true that people who have little or no debt may find themselves with lower credit scores? That can be the case. “Warren Buffett used to say that he didn’t have a particularly high credit score,” says Greene.

Consumers can obtain their FICO score from the company at myFico.com. Greene also points to a just-launched website, scoreinfo.org, that helps people understand how credit scores factor in this new era of financial regulation. As of January 2011, you have the right to receive your score any time a lender makes certain kinds of decisions — e.g., if you’re denied credit or given credit on less than the most favorable terms a lender offers.

In the U.S. economy today, people may frequently find that a credit score is being used by companies to make decisions that have nothing to do with credit. Credit scores have become part of the application process for jobs, car insurance, and health insurance. Greene notes that the credit score can be useful in non-lending contexts: “People who are good with their finances frequently turn out to be good drivers.” But he reiterates that they were designed for a purely financial use.

Medical Debts Could Kill Your Refinancing
by Cristina Lourosa-Ricardo
Wednesday, December 22, 2010

Two erroneous $11 doctor bills stopped Jeanne White from refinancing her home.

The 49-year-old resident of Colleyville, Texas, says she was shocked to learn in October that the two medical bills, which had been turned over to a collection agency, had caused her credit score to fall to 680 from 757 — making refinancing far too expensive.

“I was told I’d have to pay $14,000 in closing costs to get a 5.5% interest rate,” Ms. White says, substantially more than she would have paid with a higher credit score. When Ms. White, a retired sales manager, contacted the doctor’s office, she found out the bills had been issued in error.

Otherwise well-qualified borrowers with good loan-to-value ratios and steady employment are increasingly finding it difficult to refinance because of medical billing mistakes marring their credit, say mortgage bankers and real-estate agents.

Some 14 million Americans have errors on their credit report because of medical collections, according to the Commonwealth Fund, a Washington-based nonprofit focused on health-care research. These routinely small-balance blemishes, which can go unnoticed for years, can be a death knell for refinancing because they can cause outright refusals — or make closing costs so high that borrowers opt not to refinance at all.

A bill winding its way through Congress could provide relief for homeowners with medical-debt troubles. The Medical Debt Relief Act, which passed the House this fall and is now in the Senate, would remove settled medical debt from credit reports after 45 days, instead of the customary seven years.

Yet borrowers shouldn’t wait for relief from Washington, says Mark Rukavina, executive director of the Access Project, a Boston-based health-advocacy group. They need to take action themselves.

“Don’t assume that your credit score is pristine, and be vigilant about checking it for these medical bills,” Mr. Rukavina says, adding that borrowers should also contact a medical provider’s office immediately after a visit to ensure that all bills outstanding are covered.

When I talk about debt in this article, I’m referring to your personal credit card debt, not the many other debts which are probably equally painful, such as car loans, home mortgages, home equity loans, student school loans or tuition, etc.

This article is not intended to teach you how to avoid or get out of debt. It is intended to teach you how to avoid the second four-letter word being experienced by a growing number of consumers trying to manage and reduce their debt: scams perpetrated by ‘scam artists’ – unscrupulous debt industry members (collectors, consolidators, counselors) who want you to believe they will help you get rid of your debt, but are, in reality, con-men who are out to profit from your debt misery by convincing you to give them your money (or worse, your identity).

Debt scam artists know you are in debt. They know you need help, and that if they can be convincing enough (usually by phone) they can persuade you to give them what they want: your money or your personal information, before giving you their ‘assistance’ (in advance), in exchange for their ‘guarantees’ or ‘promises’ to help you reduce or eliminate your debt using their debt services!

Your loss is literally their gain.

The scary part is how easy it is to be victimized (ripped off) by these smooth-talking debt scam predators. Why? Because they seem so real! They know so much about you. They know you are vulnerable because your need for their help is great and your defenses are down. You will likely give them money or information to get the debt relief they promise! They are like water to a parched, thirsty person in a hot, dry desert. Your thirst for debt relief makes you desperate –they know it and are eager to profit from your misery.

Questions and Answers

Two common debt scam questions I often hear are:

1) How can I differentiate the legitimate company from the scam operation? I want to avoid the scam and select the legitimate firm to get the help I need, and not be burned again, and

2) What can I do if I have already been victimized by a debt scam? Can I get my money back? My identity?

Answers to these questions will help consumers facing the twin plagues of debt and scams.

1. How can I differentiate legitimate companies from scammers, to avoid the scam while finding a firm that can really help me reduce my debt?

• Scammers often say they are attempting to collect a debt related to an internet payday loan obtained by the consumer, but which the consumer never repaid.

• If, when questioned, the caller refuses to disclose the full name or address of the collection agency they claim to represent. It is a scam.

• If you are threatened with arrest for fraud or some other fictitious crime unless you agree to immediately wire money via Western Union, don’t do it. It’s a scam.

• If a fictitious caller tries to frighten and confuse you into paying a debt by using legal sounding terms like “We’re filing an affidavit against you” or by stating a lawsuit has been or is in the process of being filed against you. It is likely a scam.

• A hallmark of scams is calling consumers repeatedly at their place of employment.

• If the caller refuses to provide any identifying information to allow you to send a written dispute, it’s a scam.

• If the caller continues to call you, numerous times a day, regarding a payday loan you never obtained, it’s a scam.

• If you are not provided with written validation of the debt, you refuse to pay without it (which is your legal right), and you are then threatened with bring arrested, it is a likely a scam. (One person was told, ‘If that’s the case, I will have local law enforcement come to your place of business and drag you out kicking and screaming’.)

• Scam debt collectors persuade you to pay just a little of your total amount due, then use your bank information to improperly withdraw more money from your bank account.

All of these practices are typical indicators of a scam debt collection operation.

Legitimate debt collectors are legally prohibited by the Fair Debt Collection Practices Act (“FDCPA”) from making false or misleading representations (such as telling you that you have committed a crime), stating (or implying) that your nonpayment will result in your arrest, or threatening violence if you refuse to pay.

It is important to remember that legitimate debt collectors can, and do, violate the FDCPA. If a debt collector violates the federal FDCPA in trying to collect a debt from you, you indeed have legal rights which can include your damages and having your attorney’s fees paid by the debt collector. Go to www.socaldebtcollectionabuse.com for a more detailed description of your rights under the FDCPA.

Naming Names:

In addition to such typical debt scammer practices and ‘language’, some debt scam operations have been identified by federal and state law authorities by name. Scam artists have most recently identified themselves as: ACS, National Affidavit Processing Department and United Financial Crime Division. Though, like criminals, they may also use additional phony names. If you should have any questions, contact the Federal Trade Commission (www.ftc.gov) or your state’s attorney general to find out if the alleged debt collector shows up on any of the lists of phony scam artists posing as debt collectors.

2. I’ve already scammed! What can and should I do now?

As described earlier, there are two valuable things you can lose to a debt scam: your money and your identity. These are the two things that most scammers want from you. It is the reason why they contact you (either obtaining your money directly from you, or obtaining enough of your personal (financial) information (i.e. Social Security number, bank account number, etc) from you to access your money themselves.

a) If you have given a debt scammer money, your primary remedies are: filing a complaint with local, state or national law enforcement authorities (state Attorney General, Federal Trade Commission (FTC)) or business organizations (Better Business Bureau), consumer advocacy organizations), media (consumer reporters), and/or web sites (blogs, etc).

Don’t expect that any of these agencies or organizations will get your money back for you quickly (if at all). On the other hand, you will be helping other consumers who use these sources in their research of debt assistance services. Your complaint can help them avoid the same scam you just suffered.

Public law authorities such as the FTC and state Attorney General will take legal action against debt scammers when they get enough complaints about a scam to show a pattern of legal violations. Their enforcement can lead to recoupment of money from a consumer scammer, but, again, the enforcement and results do not happen overnight. (The FTC receives more consumer complaints about debt collectors than any other industry.)

Victims of debt scams can also file a lawsuit against a debt collector in state or federal court. If you believe that your rights have been violated by a debt scammer and you are in Southern California, please feel free to call me at 1-818-249-5291. You can also visit our website at www.socaldebtcollectionabuse.com.

If you are elsewhere, look for a local credit damage and consumer protection attorney at www.naca.net

However, please be advised: many scam debt collectors are “fly-by-night” operators, and suing them will do little good—they’ll simply fold their tent and go elsewhere. If my firm determines that a given debt collector is a “fly-by-night,” we will not pursue the lawsuit—it will be nothing but an exercise in frustration. Believe me, I know this from experience.

b. If you think your identity has been stolen you should:
i. Contact the three major credit bureaus (Equifax, Transunion, and Experian) as soon as possible after the theft occurs, and place a ‘fraud alert’ on your credit file. This advises your potential creditors who use that report that you are an identity theft victim (or potential victim.) Ask for an extended fraud alert, which lasts for seven years. Fraud alerts expire after 90 days. Identity thieves know this and often try to re-apply for credit with your credit information 90 days after they find out about the fraud alert.
ii. Fill out a police report about the identity theft, and make several copies. Send these copies to all three credit bureaus, and any creditors who have opened fraudulent accounts in your name. Include directions to cancel any fraudulent accounts. Send all copies by certified mail. ‘
iii. Monitor your credit report at least every week while the identity theft situation is occurring. If you see any false or fraudulent charges, immediately send a certified letter to the creditor, with a certified cc to the credit bureaus, informing them that the charges are false. Keep copies of all letters and continue to monitor your credit reports to see that the false charges are corrected.
iv. If you suffer damages as a consequence of your identity theft and wish to consult a lawyer, please contact our offices (if you’re in Southern California) at 1-818-249-5291. You can also contact us online at www.socalcreditdamage.com. If you are elsewhere, look for a local credit damage and identity theft attorney at www.naca.net

v. As with lost money, file a complaint with federal and state consumer law enforcement authorities (the FTC, your state Attorney General’s office). The FTC uses the information to coordinate with the FBI to track down the larger identity theft rings and break them up.

vi. File complaints on-line with consumer advocacy/fraud organizations such as the National Consumer League’s Fraud Center, at www.fraud.org, or the National Consumer Law Center, at www.consumerlaw.org.

vii. Share your information with a local newspaper’s consumer reporter.

viii. Share your experience through social networking sites, blogs, and elsewhere on the internet. The more people learn about your experience, the more you will help them avoid such scams and perhaps help law authorities find and stop the debt scammer.

There are many types and forms of debt and debt scams. Any time you owe money to another party, including a bank, other lender, business, or person, it is a debt. This article focused on debt scams involving consumer credit-related debt. Future articles will focus on avoiding scams associated with other common kinds of debt –home mortgage, equity loan (2nd mortgage), car loan, student loans, and more.

Copyright © 2010 by Robert F. Brennan. All rights reserved. If you should have any further questions about your rights with respect to debt collection or credit reporting, go to www.socalcreditdamage.com or www.socaldebtcollectionabuse.com, where you can send us an email. You can also call us at (818) 249-5291. Thanks for reading!